Executive Employment Contracts: Key Elements for the Executive

Summary of the essential elements of an executive employment contract or an executive employment agreement from the executive's perspective.

1. Guaranteed Minimum Term of Employment

   What is the duration of the employment? This fundamental is often overlooked. If the agreement contains employment at-will language, the employment is indefinate. Removing the at-will language is not enough though. Precise language that guarantees a specific minimum term of employment must be carefully crafted.

2. Salary

   The contract should state the salary and lock it in so it can't be decreased in the employer's discretion or after any annual or other review period. The contract should also contain language providing ascertainable standards and time-frames for increases.

3. Other Compensation

   Clear and mandatory language is essential to establish the entitlement to bonus and incentive compensation as well as the method of their calculation. Nothing should be discretionary or murkey. Vauge references to unfamiliar or unseen bonus or incentive plans can become pitfalls down the road.

4. Benefits

   All basic benefit entitlements should be spelled out. Expense reimbursement policy and vacation benefits should also be included.

5. Severance

   It is imperative to include a non-discretionary contractual severance provision that guarantees the payment of a specific amount of severance and other benefits in the event of an involuntary termination of employment. There are many considerations involved in drafting an effective and comprehensive severance provision. All possibilities must be anticipated.

6. For Cause Termination

   Most executive employment contracts excuse the employer from paying severance if the executive is terminated for cause. That's why it's so important to narrowly define cause and make sure it doesn't include performance.

7. Insurance and Indemnification

   There should be a provision requiring the employer to maintain all applicable insurance coverage for the executive in full force and effect during the employment, as well as tail coverage post-employment. An indemnification clause in which the employer agrees to indemnify and hold the executive harmless from any liabilities arising out of the employment is also essential.

8. Change in Control

   What happens if the company is sold or ownership of the employer otherwise changes hands? There are many considerations. One basic is a term that ensures that the new company or new ownership must remain bound by the terms of the existing employment contract. Another is to give the executive the option to elect automatic severance and the acceleration of unvested benefits, stock options, and incentive compensation in the event of a change in control.

9. Resignation for Good Cause

   Events may occur that justify an executive's resignation for good cause, such as a material breach of the employment contract, or a diminution of the executive's compensation, benefits, job title, status, duties or responsibilities. The contract should guarantee severance to an executive who resigns for good cause, with the same payments and benefits as those provided for an involuntary termination.

10. Renewal

    What happens after the initial term expires? This is often unanticipated. There are many options to consider, such as automatic renewal, unless a party gives prior notice of non-renewal. After renewal, the employment could continue for another specific term of the same or different duration, on a year-to-year basis, or be left open to re-negotiation.